Is $2 Million Enough to Retire in Comfort (and Without Too Much Stress)?

Chad Holland |

Is $2 million enough to retire and enjoy a stress-free and comfortable retirement? This question is increasingly relevant in today's landscape of economic volatility and extended lifespans. Since $2 million is frequently viewed as a retirement savings benchmark, it's essential to know if this amount is still a plausible goal. This article provides a realistic appraisal of what this number means for retirees today and how you can help prepare for the best retirement experience possible, whatever your budget.

The Burning Question: How Much is Enough Retirement Savings?

Every day, a large percentage of retirees (or future ones) likely wonder how much money they should have saved up to avoid financial stress. How can you tell if $2 million should be enough? Unfortunately, there is no easy shortcut to determine how long your savings will stretch. Instead, retirement planning is the best tool to determine how long your savings is likely to last. Even so, it is just an estimate.

However, this formula goes beyond pure mathematics. Determining how much is sufficient for your retirement is an extremely personal question. It's not a one-size-fits-all number by any means. Instead, it depends upon key considerations such as :

  • What kind of retirement lifestyle do you envision for yourself?
  • How much will your fixed expenses be each month?
  • How long are you likely to live?
  • What are your potential healthcare costs?
  • How much will inflation likely be in the future?

As you can see, some of these factors are within your control, while others are not.

A comprehensive retirement plan must factor in all these elements and more, as well as offer flexibility to adapt to changing circumstances. 

What Does Retiring with $2 Million Dollars Look Like?

If you're going to target a specific number, such as $2 million, then lifestyle design can be a determining factor. Your definition of "retire comfortably" might be far different from someone else's. For example, if you have a modest home and one car in retirement, that will likely support a much smaller retirement nest egg than if you have a large home, a vacation home, two cars, and a boat. In the case of the latter, you'll obviously need a much larger annual income.

Another factor that is within your control is retirement age. According to a Gallup survey, the average retirement age was 62 in 2022, although recent surveys are showing Americans planning to work much longer, often into their 70s. This is a very personal choice that can have a big impact on your future. 

And the earlier you want to retire, the more time you should put into retirement planning to make sure you're ready. That's wise, since if you retire at 55 instead of 75, for example, you'll have twenty fewer years to build your savings. You'll also have less time to generate earnings from the stock market and other investments. So careful planning is far more important if you're aiming for a younger age since you'll have less of a margin for error.

Still, some factors are outside of your control. Life expectancy is one of them. While the average American lifespan is actually decreasing, there are many individuals who end up living far longer than expected. According to numbers from the Society of Actuaries, one out of two women and one out of three men currently in their mid-50s will live to age 90. 
Another factor that determines how long your money will stretch is the inflation rate. If inflation continues at a high level, then your $2 million nest egg will not go as far as it would at today's prices.

Comprehensive Retirement Planning Can Help Determine Your Required Income in Retirement

By now, you're probably seeing that the question "Can you retire with $2 million dollars" is not a simple one. That's why many people do best with financial planning help from a qualified and experienced financial advisor. A comprehensive retirement plan can help you answer that question with far more certainty. 

More importantly, a good plan will identify specific steps you can take now to increase your odds of reaching retirement age with the amount of savings necessary to live your desired lifestyle.

Which Financial Planning Strategies Can Help You Plan an Early Retirement?

Early retirement is a hot topic today, with many people looking to retire or even semi-retire earlier than in the past. Fortunately, there are things you can do now to help make reaching your retirement goals more of a reality.

Taking action now rather than later can help you increase your retirement income and lessen the chance that you will ever run out of money. Even if you're starting before you have a million saved, taking a proactive approach is never a bad idea.

Let's review some of those strategies now.

Maximizing Your Social Security

One strategy that can help you make the most of your retirement income is optimizing your Social Security benefits. We do realize that Social Security will likely be subject to cuts in the future. That's a necessity to keep the system solvent. However, that doesn't mean it will disappear as one of the sources of income to help meet your retirement needs.

So, it's helpful to include your Social Security income in your planning. While it likely will not be enough on its own to support you in your golden years, it can help you keep up with rising costs in many areas of your budget. And you will receive that income for the rest of your life, providing you with an annuity-like fixed payment that is inflation-adjusted.

You can optimize your Social Security income by analyzing your choices for claiming dates. One common strategy is simply waiting to claim. While you are eligible for benefits at age 62, waiting can pay. For each year you wait to file for Social Security, your lifetime monthly benefit will increase by about 8%, up to age 70. That's a significant increase, so unless you need the money sooner for some reason, it is worth considering.

If you have a spouse, you'll want to analyze your options and coordinate the best times for each of you to retire and claim benefits. Your financial planner can help you determine if a staggered claiming strategy will result in a bigger benefit.

Also, if you're divorced and not remarried, you may be able to collect on your ex-spouse's record, which may result in a higher benefit. Again, review this with your financial planner so you can maximize this benefit. Also, this Social Security retirement calculator can help you see what you'll collect throughout retirement based on different inputs.

Guaranteed Income Strategies for Retirement Income

Another strategy that more people are considering today is essentially creating your own pension with annuities. In retirement, having some fixed monthly income sources that will last the rest of your life can provide considerable peace of mind. Since most of us are not fortunate enough to have a pension from an employer, you can basically create something similar for yourself using an annuity.

Annuities did not always make sense in low-interest rate environments, but today are gaining in attractiveness as overall rate of return trends on cash have recovered. So, one strategy you can evaluate is the purchase of an annuity to help lock in a fixed source of income to cover your regular monthly expenses. Just be very mindful of fees and costs, and always be sure to weigh the pros and cons carefully before purchasing an annuity.

Managing Expenses in Retirement and Navigating Cost of Living Increases

One critical part of this entire equation is the need to manage expenses throughout retirement. So, that means identifying your ideal retirement lifestyle and then using that to determine how much money you will likely need on a monthly basis.

For example, one big decision is where will you live. Your choice of location can have a big impact when it comes to how much you will need to spend in retirement. Different areas of the country have different tax rates as well as cost of living differences, which can impact your money lasting through retirement.

Many people move to low-tax states or downsize into smaller, less expensive homes. But it is also good to look at the other associated expenses such as property taxes, insurance, homeowners associations, etc. All can impact your decision, and the tighter your budget, the better it is to keep your expenses low to help ensure your $2 million in retirement money will last (or whatever number you decide on).

Choosing Your Retirement Age 

Another big determinant in how long $2 million will last in retirement is at what age you start.

If you retire at 50, you may have up to five decades to fund. Retire later, even retire at age 60, and you have more time to stretch that $2 million nest egg.

But also keep in mind that this choice may not be totally under your control. Many people plan to work longer in retirement but end up having to stop earlier due to health problems or an unexpected layoff. 

Looking at an early retirement, such as a plan to retire at 40? In that case, planning is critical since your funds must last far longer than for most. And that may require more sacrifices today to build up savings. 

Maximizing Your Retirement Accounts

Another strategy that can help you build up the money you need for the future is making the most of your retirement accounts. Those accounts may include a workplace 401(k), an IRA (individual retirement account), or other tax-advantaged accounts like health savings accounts. 

Putting away more in these accounts often makes sense since you can then harness tax-advantaged growth:

  • Traditional retirement accounts give you an upfront tax break, then provide tax deferral. Once you reach full retirement age, you then will pay regular income tax on withdrawals.
  • Roth retirement accounts require you to pay tax on contributions, but then all withdrawals in retirement are tax-free.
  • Health savings accounts (HSAs) combine the best of both worlds, letting you contribute pre-tax, but also withdraw money tax-free when used for a wide variety of health-related expenses.

All of these accounts have annual maximum contributions that limit what you can put into them. However, once you reach age 50, you can also take advantage of "catch-up contributions". These allow you to contribute more each year as you get closer to retirement. Please note that catch-up contributions for health savings accounts are slightly different and, instead, start at age 55.

Are You Too Old for a Roth IRA?

When you're thinking about retirement, you might think you are too old to take advantage of a Roth IRA. That's not necessarily the case. We recently wrote a blog on this specific topic, if converting a traditional IRA to a Roth after age 60 makes sense.

But even if you're not yet 60 years old, many factors impact the choice of a traditional retirement account versus a Roth (or even both). This is a decision that requires analysis, so it is wise to consult with financial experts, such as your financial planner and tax advisor, before converting an account or maxing out your contributions.

The Role of Tax Planning When You Want to Retire with $2 Million Dollars

One other specific issue to be aware of is taxes. Many people focus on getting to $2 million to retire (or some other number), but that's not the whole picture. Taxes can take a significant bite out of your retirement income plan if you're not careful.

And remember, it's not just federal taxes. State taxes can vary, and some states even tax Social Security and other retirement income sources. 

So that means tax planning should be a part of every financial decision you make, and retirement planning is no exception. That's why at Holland Capital Management, we provide tax planning as part of our regular scope of service. You don't pay extra for the service, and your financial advice has the benefit of tax strategy, helping you spend less on taxes so you can save more for your future. 

This can be especially impactful since most taxes are an annual expense. How long your money lasts in retirement depends upon many factors, but taxes are an important consideration. 

How to Stress Test a $2 Million Portfolio with Monte Carlo

The last section gave several ways to improve your retirement saving profile, so the longevity of your $2 million depends upon fewer factors. But how do you know you can live at a certain level without running out of money? While there's no crystal ball, there are some ways to stress test your plan to make sure it is robust enough to withstand various scenarios. 

One testing method is called Monte Carlo testing, and that can help you determine if $2 million will be enough in most expected scenarios. To assess the resilience of a retirement portfolio, Monte Carlo simulations test your portfolio against a range of economic scenarios to evaluate the likelihood of sustaining your desired lifestyle throughout retirement. These simulations factor in market volatility, investment returns, inflation, retirement date and withdrawal rates, providing a probabilistic view of your portfolio's performance over time. By simulating thousands of potential outcomes, this tool helps identify weaknesses in your retirement strategy, enabling adjustments to increase the odds of financial stability in various market conditions.

Is $2 Million Enough to Retire as a Married Couple? 

Can a couple retire with this type of nest egg. $2 million could be enough, but again, you want to figure that out in planning, not in practice. Either way, retirement planning for married couples takes the overall planning up a notch, whether you're aiming for a $2 million nest egg or some other amount. Along with determining requirements for your future, then you must layer on your spouse to see if $2 million is enough. 

It's vital to approach this as a team, harmonizing individual retirement goals and financial habits. Key aspects include determining a combined retirement income target, considering the impact of both partners' retirement ages, and addressing the potential for differing life expectancies. In the case of early retirement planning, you may want to run simulations assuming one partner will retire even as the other one continues to work.

Every couple needs joint planning that encompasses healthcare strategies and estate planning, ensuring that both partners are prepared for various scenarios. This collaborative approach not only aligns financial goals but also fosters a shared vision for retirement, paving the way for a more secure and harmonious future together.

Conclusion: Will $2 Million Last in Retirement?

As we conclude, it's clear that the question "Is two million dollars enough to retire in comfort and without too much stress?" cannot be answered with a simple yes or no. As you are approaching retirement, it is a multifaceted issue that demands personalized planning. 

Determining if $2 million will last means considering factors like expenses, lifestyle, health care costs, inflation, and life expectancy. Then, care must be taken to determine the optimal year of retirement, of course, keeping in mind that you may not necessarily have the luxury of choice.

Another key component for planning your retirement requires you to get clear on what type of lifestyle you want. Along with running the numbers, it is critical to take some time to envision what your day-to-day life will look like. That's because annual lifestyle expenses can often determine if your $2 million retirement fund will cut it or not.

Ultimately, retirement planning is not just about reaching a financial target; it's about creating a sustainable and fulfilling lifestyle that you can enjoy without financial stress. So the sooner you start planning, the better.